The IRS is clear that there is no magic test to determine whether a worker is an independent contractor or an employee. This determination is fact specific, and made on a case-by-case basis. With today's stricter employment laws, it is important that businesses make a careful evaluation before classifying someone as an independent contract.
That being said, let's talk about how the factors that the IRS usually considers. The general consideration is whether the worker as the right to control not only the work outcome but how the worker generally performs the work. The IRS' common law rules cover three main categories of behavioral control, financial control, and type of relationship. And the IRS and Labor Department looks at the totality of the situation.
In real world terms, the best documentation shows that the worker has a bona fide business separate from yours. Other paper documentation can show that the worker fully controls his/her own work, the worker is free to make a profit or loss, the work he/she provides is not an integral part of what your business provides, and/or the worker is free to be hired by others.
Additionally, businesses can further protect themselves by keeping a vendor file for each worker, once classified as independent contractor. The following are some items to include:
- A written contract
- Proof of a real and separate business
- Invoices
- Form W-9
A couple scenarios that may raise red flags include re-hiring a former employer in an independent contractor capacity, using interns in the capacity of employees (stay tuned for a specific blog post on interns in the workplace), providing office supplies and equipment to your employees, and/or the worker is on a long-term rather than project basis.
Please ensure to check your individual state's requirements, as an independent contractor in one state may not be so in another state. And certain industry specific job classifications have specific court determinative rulings or guidance. This is a great area to practice acting in an abundance of caution as back-wages and penalties can be very costly.
Stay tuned for future blog posts from Pucher Law, Small Batch Legal.